BI's bank supervision role may be cut

BI's bank supervision role may be cut

JAKARTA (JP): The government and the House of Representatives
special team on the amendment of the central bank law have agreed
to axe the banking supervision function of Bank Indonesia much
sooner than the initial plan at the end of 2002.

The banking supervision role will be handled by a new
independent agency which would also supervise other non-bank
financial institutions, including, insurance companies and
pension funds.

The government will propose to the House a new law that would
become a legal basis for the establishment of the new agency.

"It has been agreed that the new law (on the establishment of
the new agency) will be completed at the latest by the end of
2001," Bank Indonesia deputy governor Achjar Iljas told reporters
following a closed doors meeting with the government and the
House special team late last week.

But Achjar said that there was no discussion yet on the
details of the new agency that would take over the bank's
supervision role.

Under the existing Bank Indonesia Law No. 23/1999, the banking
supervision function would be separated from the central bank by
the end of next year.

The government has proposed a bill that would amend the
existing central bank law. The House is expected to complete the
deliberation of the bill at the latest in the middle of February.

Bank Indonesia became an independent central bank in May 1999
following the approval of Law No. 23, but it has yet to release
its banking supervision function even though the main objective
of an independent central bank is normally to maintain the
stability of the rupiah.

The government has argued that retaining the banking
supervision role of Bank Indonesia would create conflicts of
interest between the central bank's monetary management
responsibilities and its monitoring and supervision of the
payment flow system.

The government and the House will have to revise the existing
banking Law No. 10/1998, which stipulates that banking
supervision is handled by Bank Indonesia.

But it is still a big question mark whether the government and
the House can work fast to meet the new target.

A source at Bank Indonesia had even doubted whether the
initial end of 2002 target could be met because both the
government and the central bank had not been able to even start
discussions about the plan last year as most of their energy and
time had been devoted to settling the controversial Bank
Indonesia liquidity support facility.

There has also been a question mark over where the staff of
the new independent agency would come from.

There is a plan to recruit most of the staff from Bank
Indonesia, but there has also been a suggestion that the new
agency should be run by a completely separate group of people to
help avoid the banking sector from plunging into yet another
crisis.

The banking crisis that started in the middle of 1997 has been
partly attributed to the weak banking supervision of Bank
Indonesia. Many also believe that the central bank was part of
the corrupt system during the 32 years rule of former
authoritarian president Soeharto.

Achjar warned that the transfer of the banking supervision
role from Bank Indonesia to the new agency should be carefully
implemented so as not to create new problems to local banks
currently trying to survive the crisis.

"What is important is that the transfer process must not
create new problems because the banking sector is currently in a
recovery process. We don't want to see things that have run
properly so far become worse," he said, without elaborating.

Achjar also expected the new agency to be able to work closely
with the central bank.

"The mechanism should be stipulated in the law so that it can
be properly coordinated. There's a strong relation between
monetary policy and micro policy in banking supervision," he
said.

The banking sector has two main agendas this year. It must
have a minimum capital adequacy ratio of 8 percent and a non-
performing loan level of below five percent.

Banks which fail to meet the target could be either closed
down or merged with stronger banks.

There are currently some 150 commercial banks after the
government shut down around 66 banks following the 1997 banking
crisis.

The government is preparing plans to continue consolidating
the currently over-crowded banking industry with the aim that by
2005 there would only be around 15 "core banks" and around 20
"focus banks."

The government is also planning to launch an insurance deposit
scheme that would replace the costly blanket guarantee scheme
launched in 1998.

The government initially planned to replace the blanket
guarantee program in 2004, but there has been growing pressure to
change it sooner. (rei)